Check Out Target for Its Dividend; Profit From Its Growth Later

Target stock is one to hold not just for its dividend, but for its long-term potential.
By Richard Saintvilus ,

Shares of Target (TGT) - Get Report , one the largest retailers in the U.S., will trade ex-dividend Wednesday, Nov. 16. To qualify for a dividend check, investors must own shares of the Minnesota-based company on or before its ex-dividend date -- the day it finalizes its roster of the shareholders to whom it will send dividend payments.

Playing "Dividend Capture" can make tons of sense. This is where investors or traders buy shares of companies before their ex-dividend date for the sole purpose of collecting the quarterly dividend and then immediately selling the stock within days after the dividend cash payment has been paid the company.

In this case, Target stock, which is down some 2% on the year, but up 13% in the past 12 months, is scheduled to pay its 56-cent quarterly dividend on Thursday, Dec. 10, marking the third straight quarter during which Target will pay the same dividend. And Target has been extremely generous, raising its dividend by 230% in the past five years.

With the stock currently trading at around $75, Target's annual dividend yield of 3% is one percentage point higher than the 2% yield paid out by the average stock in the S&P 500 (SPX) index. Beyond its dividend, there's also tons of value in Target stock. Despite its consensus hold rating, analysts on average expect Target stock to reach $84 in the next 12 months.

Analysts' confidence might have to do with recent improvements in Target's business outlook, driven in part by its testing of smaller CityTarget and TargetExpress stores, which the company hopes will help it better compete with larger competitor Walmart's (WMT) - Get Report Neighborhood Market stores.

All told, it seems Target has now moved beyond being just a turnaround story to one focused on growing revenue and profits. The company is projected to grow earnings at a 10% average annual rate in the next five years. Not only is the company enjoying higher gross margins, but improvements in average selling prices bode well for the stock price since Target can then make more money on less sales.

Target stock is one to hold not just for its dividend, but for its long-term potential.

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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